Shifting ground can move your portfolio. Subsidence, the damage caused to buildings due to ground movement resulting from the presence of expansive clay soils, can lead to costly claims that may not be expected. A subsidence problem can take years to materialize, which makes careful risk modeling incredibly valuable. Refining a sense of your portfolio’s subsidence exposure can help you manage your capital effectively, transfer risk if necessary, and improve your firm’s market performance.

Making the Ground Move

Some types of soil expand when wet and shrink as they dry. The resultant changes in soil volume cause the ground to shift, moving building foundations and placing their superstructures under stress. Such stress can cause visible damage, compromising the building’s integrity and requiring cash for repairs. The damage caused by subsidence can be difficult to predict and costly to cover.

“Subsidence” as considered by our model relates to the damage caused by particular soil properties, strictly termed as the downward movement of a building caused by soil shrinkage. Damage caused by the opposite process - the swelling of soil that pushes a structure upward - is called “heave.” The Guy Carpenter subsidence model addresses both phenomena.

The risk of subsidence is significant in areas where the soil’s clay mineral content is greater than 5 percent by weight. Clay minerals - particularly the smectite clay montmorillonite - have a propensity to expand when water is added and contract as they dry. This soil property can cause considerable building damage when combined with certain meteorological conditions. Seasonal changes in soil humidity lead to cycles of drought and rewetting, which result in an ongoing shrink/expand dynamic. The accompanying soil movements that occur, stress the building and can lead to damage (and claims).

Given that the absorption and extraction of soil moisture is one element that contributes to the subsidence hazard, man-made sources of water can aggravate an underlying problem. For example, localized underground water sources can result from leaking swimming pools, water pipes, and drainage systems, causing clay soils in building foundations to expand in a non-uniform manner. In the same way, large tree roots and dense vegetation in proximity to buildings will consume soil moisture, causing localized drying of the foundation soil.

Assessing the Damage, Threat

Subsidence can take years to manifest itself, leaving plenty of time for small, manageable problems to become large and expensive. Although certain subsidence problems result in only cosmetic damage, the worst cases can cause essential structural elements to become dislocated, cracked, or warped. To ensure that a severe subsidence problem does not recur, the building foundation needs to be deepened beyond the zone of expansive soil - a process known as underpinning. Every homeowner - and insurer - knows that such repairs are not cheap.

Of course, subsidence hazard does not necessarily translate to damage and some structures are more vulnerable than others. For example, relatively small and light buildings of up to two levels, such as detached houses, warehouses and structures without foundations are at greatest risk.

Insuring for Subsidence

In terms of the extent of expansive clay soils across Europe, the UK, France, Denmark, and Greece are potentially at risk from damaging subsidence events. Since 1976, insurance carriers in the UK have paid EUR8 billion in subsidence-related claims. UK insurers have adapted to the problem, requiring higher deductibles for properties in areas at risk and contracts have several policy exclusions. The flow of claims continues, but their cost is trending downward.

For example, in the UK, the cost of claims peaked at approximately EUR800 million in 1991, coming down to GBP408 million in 2003 (EUR484 million at November 30, 2008 rates) and ultimately to GBP162 million (EUR192 million at November 30, 2008 rates) in 2007. Similarly in France, subsidence (known alternatively here as “retrait-gonflement”) has been a costly peril. In the 10 years following its inclusion in the Catastrophes Naturelles scheme in 1989, subsidence became the second costliest natural peril behind flood. From 1989 to 2003, subsidence claims cost on average over EUR250 million per year to the French insurance industry. This equates to claims made by hundreds of thousands of households across vulnerable regions of the country.

Many existing subsidence models have accessed various data sets (e.g., soil type, vegetation, climatic information) to apply risk ratings to geographic areas (e.g., by postal code) or specific buildings. In addition to varying in resolution, such models also differ in the approach used to assess the hazard. When assessing the subsidence risk to an individual building situated on a clay soil, it may be sufficient to take into account the presence of large trees. Other models that operate across a larger scale may require access to soil maps or geological databases. More complex models may additionally assess how cyclical meteorological phenomena change subsidence risk over time.

Yet, there has been a gap in the marketplace. While most models have focused on ratings that identify areas at risk, the probabilistic modeling of subsidence due to expansive clay soils has not been addressed as extensively. To support insurers that have subsidence-exposed portfolios in France, Guy Carpenter has developed the first probabilistic subsidence model available for the entire country, helping carriers to identify the hazard and quantify the associated risk, ultimately allowing for more prudent capital management decisions. This model focuses on France, where the damages and cost of subsidence has been severe, but the methodology can be applied to other countries given equivalent data sets.

Guy Carpenter’s effort, which began in 2005, uses detailed maps - created by the French geological research institute Bureau de Recherche Géologiques et Minières (BRGM) - detailing subsidence hazard for the departments of mainland France and Corsica. With this approach, we are able to identify different degrees of risk based on the mapping of expansive soils in relation to building location. Alongside assessment of the hazard, a stochastic event set was derived principally from European meteorological data from 1960 to 2007 based on an estimation of the change in volumetric soil water content over 500 soil drought/ re-humidification cycles. Estimation of the soil water content included incorporation of information relating to rainfall amount, differences in air temperature, surface water runoff and the presence of vegetation.

In order to assess damage to building stock from defined subsidence events, a built environment module details the different types of building construction, as well as land-use per model unit (approximately 1 km2). By combining the built environment with a set of more than 30 vulnerability functions that have been developed for each construction and land-use type, it is possible to determine the effects of subsidence events of varying intensity. Damage for each event is gauged by the location of building stock in relation to the hazard and the severity of the event in question. The subsidence model only considers damage to houses and apartments as these are known to be most at risk from this peril.

This model is a powerful tool, equipping carriers in France to identify the threats to their portfolios and take action before claims begin to mount. Understanding the risk more thoroughly can translate to the improved deployment of firm resources, wider margins, and ultimately growth in firm value.

An Eye on the Future

The subsidence hazard is not static. The reality of climate change - which may include changes in precipitation and therefore drought occurrence - could increase the subsidence hazard of certain areas. Projections currently suggest that Mediterranean regions will experience decreases in precipitation and in soil moisture content during summer months. Regions in Central and Eastern Europe may be exposed to temperature extremes, as well as a decline in summer precipitation.

The situation is much different for maritime areas in northwestern Europe. Here, winter precipitation is expected to increase, leading to greater river flow, accompanied by an elevated risk of coastal flooding. Additionally, temperature increases above the global mean are likely to occur in the UK and other northern European countries. In London and other southeastern areas of the UK, increases in summer temperatures accompanied by reductions in rainfall by around 20 percent to 40 percent are projected

Future climatological shifts are likely to translate into changing patterns of soil moisture, exacerbating subsidence hazard in areas already affected and introducing the threat to places that may not presently be at risk. Insurers and reinsurers, therefore, must remain vigilant in regards to this fluid peril. Areas not at risk today could become sources of heavy or frequent claims a decade from now. Fortunately, the tools needed to understand and prepare for subsidence exist. Insurers and reinsurers can take action now to protect future returns.